Monday, 9 September 2013

Labour Market Deregulation and all that

over at Vox there are two papers really worth reading. They are not all that long.

The First examines Portugal and what happens with a bit of labour marker deregulation. 
It is fascinating. It appears the result is that as one might expect there is increased income and employment but it goes mainly to the better educated workers.

the Second examines raising the minimum wage
Again we see results we might expect. Raising minimum wages reduces net job growth over time. the effect is not immediate.

So if the best policy to boost employment and reduce unemployment would be to deregulate the labour market and reduce minimum wages.

Australia has had a reasonably deregulated labour market since 1993.however we have some of the highest minimum wages in the OECD.
A reasonable policy response by the New Government would be to adopt a previous National Party  government labour market policy of 96 pages which Peter Reith wanted to do in 1996 but was over-ruled by John Howard. John Howard wanted more regulation of the labour market hence work choices.

The best way to reduce minimum wages would be not to raise them at all in future and protect the lower wage workers with a form of family tax credits.

This is expensive for the Government but extremely healthy for the economy and people. NAIRU falls a lot.

Just before we leave how do you spot a regulated labour market?
There are three signs to look for

1) Increased industrial disputation
2) Wages rising higher than you would expect given the economy
3) Higher than normal unemployment given the state of the economy

Guess what none of any of the three signals exists in Australia. Indeed if anything quite the opposite!

Postscript
It is important  microeconomic reforms are not undertaken when the economy is in a recession or worse as they can worsen the economy as shown here.( thanks to Kevin O'Rourke). It is like imposing Austerity when the economy is slowing. You only makes things worse.(Readers will remember the OECD put out a paper saying similar things a while ago.)

Luckily the Australian economy is not there and the micro-economic reform is only at the margin.